**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

 

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**FORM 10-Q**

 
| **Mark One**                                                                                                                                                                                                                       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                               |
| **ý****Quarterly Report Pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934**                                                                                                                        |
|                                                                                                                                                                                                                               |
| **for the Quarterly  Period Ended March 31, 2004.**                                                                                                                                                                           |
|                                                                                                                                                                                                                               |
| **or**                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                               |
| **o****Transition Report Pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934**                                                                                                                            |
|                                                                                                                                                                                                                               |
| **for the Transition  Period From                   To                   .** |
|                                                                                                                                                                                                                               |
| **Commission file number:   000-25755**                                                                                                                                                                                       |

 

**WORLDGATECOMMUNICATIONS, INC.**

(Exact Name of Registrant as Specified in ItsCharter)

 
| **Delaware**                                                                                        |   | **23-2866697**                       |
|-----------------------------------------------------------------------------------------------------|--------|--------------------------------------|
| (State of Incorporation)                                                                            |   | (I.R.S. Employer Identification No.) |
|                                                                                                |   |                                 |
| **3190 Tremont Avenue  Trevose, Pennsylvania 19053**                                                |
| (Address of Principal Executive  Offices)        (Zip Code) |
|                                                                                                |
| **(215)  354-5100**                                                                                 |
| (Registrant’s Telephone Number, Including  Area Code)                                          |

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes ý No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

 

As of May 9, 2004, there were 28,475,538 shares of common stock, parvalue $.01 per share, outstanding.

 

 

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WORLDGATE COMMUNICATIONS, INC.

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED MARCH 31,2004

 

TABLE OF CONTENTS

 

 
| PART II. FINANCIAL INFORMATION                                                                                     |   |
|--------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                               |   |
| Item 1.  Financial Statements                                                                                 |   |
| Item  2.  Management’s Discussion And  Analysis Of Financial Condition And   Results Of Operations. |   |
| Item 3.   Quantitative And Qualitative Disclosures About Market Risk.                                         |   |
| Item 4.   Controls And Procedures.                                                                            |   |
|                                                                                                               |   |
| PART II. OTHER INFORMATION                                                                                         |   |
|                                                                                                               |   |
| Item 1.  Legal Proceedings.                                                                                   |   |
| Item 2.   Changes In Securities And Use Of Proceeds.                                                          |   |
| Item 3.   Defaults Upon Senior Securities.                                                                    |   |
| Item 4.   Submission Of Matters To A Vote Of Security Holders.                                                |   |
| Item 5.  Other Information.                                                                                   |   |
| Item 6.   Exhibits And Reports On Form 8-K.                                                                   |   |

 

2

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PART I. FINANCIAL INFORMATION

 

# ITEM 1. FINANCIAL STATEMENTS

 

**WORLDGATECOMMUNICATIONS, INC.CONSOLIDATED BALANCE SHEETS**

 

**(Dollarsin Thousands)**

 
|                                                                                                                                                                                                 |   | **March 31,  2004** |   | **December 31,  2003** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                                                                                                                                                                                                 |   | **(Unaudited)**          |   | **(Audited)**               |   |
| ASSETS                                                                                                                                                                                               |   |                     |   |                        |   |
| Current assets:                                                                                                                                                                                      |   |                     |   |                        |   |
| Cash and cash equivalents                                                                                                                                                                            |   | $                        | 3,448  |                        | $      | 3,365 |   |
| Accounts receivable, less allowance for  doubtful accounts of $0 at March 31, 2004 and $381 at December 31,  2003                                                                          |   | 112                      |   | 146                         |   |
| Prepaid and other assets                                                                                                                                                                             |   | 75                       |   | 199                         |   |
| Total current assets                                                                                                                                                                                 |   | 3,635                    |   | 3,710                       |   |
|                                                                                                                                                                                                 |   |                     |   |                        |   |
| Property and equipment                                                                                                                                                                               |   | 2,613                    |   | 2,605                       |   |
| Less: accumulated depreciation and  amortization                                                                                                                                                     |   | (1,440                   | )      | (1,338                      | )      |
|                                                                                                                                                                                                 |   |                     |   |                        |   |
| Property and equipment, net                                                                                                                                                                          |   | 1,173                    |   | 1,267                       |   |
| Deposits and other assets                                                                                                                                                                            |   | 3                        |   | 140                         |   |
|                                                                                                                                                                                                 |   |                     |   |                        |   |
| Total assets                                                                                                                                                                                         |   | $                        | 4,811  |                        | $      | 5,117 |   |
|                                                                                                                                                                                                 |   |                     |   |                        |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                            |   |                     |   |                        |   |
| Current Liabilities:                                                                                                                                                                                 |   |                     |   |                        |   |
| Accounts payable                                                                                                                                                                                     |   | $                        | 345    |                        | $      | 440 |   |
| Accrued expenses                                                                                                                                                                                     |   | 705                      |   | 594                         |   |
| Accrued compensation and benefits                                                                                                                                                                    |   | 199                      |   | 238                         |   |
| Deferred rent credit, current and other                                                                                                                                                              |   | 30                       |   | 30                          |   |
| Total current liabilities                                                                                                                                                                            |   | 1,279                    |   | 1,302                       |   |
|                                                                                                                                                                                                 |   |                     |   |                        |   |
| Deferred rent credit                                                                                                                                                                                 |   | 128                      |   | 135                         |   |
| Total liabilities                                                                                                                                                                                    |   | 1,407                    |   | 1,437                       |   |
|                                                                                                                                                                                                 |   |                     |   |                        |   |
| Stockholders’ equity:                                                                                                                                                                           |   |                     |   |                        |   |
| Preferred Stock, $.01 par value, 13,500,000  shares authorized                                                                                                                                       |   | —                   |   | —                      |   |
| Common stock, $.01 par value, 50,000,000  shares authorized, 27,771,748 shares issued and outstanding at March 31,  2004 and 25,706,843 shares issued and outstanding at December 31, 2003 |   | 283                      |   | 262                         |   |
| Additional paid-in capital                                                                                                                                                                           |   | 204,908                  |   | 202,466                     |   |
| Unearned compensation                                                                                                                                                                                |   | (400                     | )      | (400                        | )      |
| Accumulated deficit                                                                                                                                                                                  |   | (201,382                 | )      | (198,643                    | )      |
| Less Treasury Stock, at cost - 500,000  shares as of March 31, 2004 and December 31, 2003                                                                                                  |   | (5                       | )      | (5                          | )      |
| Total stockholders’ equity                                                                                                                                                                      |   | 3,404                    |   | 3,680                       |   |
| Total liabilities and stockholders’ equity                                                                                                                                                      |   | $                        | 4,811  |                        | $      | 5,117 |   |

 

The accompanying notes are an integral partof these financial statements.

 

3

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**WORLDGATECOMMUNICATIONS, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

**(Dollarsin Thousands, Except per Share Amounts)**

 
|                                                                                                                                                                  |   | **Three  Months ended March 31** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                                                                                                  |   | **2004**                              |   | **2003** |   |
|                                                                                                                                                                  |   |                                  |   |   |   |
| Revenues from operating activities of  continuing operations                                                                                                          |   |                                  |   |   |   |
| Equipment product revenues earned from third  parties                                                                                                                 |   | $                                     | 0      |   | $ | 0 |   |
| Equipment product revenues earned from  related parties                                                                                                               |   | 0                                     |   | 0 |   |
| Service fee revenues earned from third  parties                                                                                                                       |   | 0                                     |   | 0 |   |
| Service fee revenues earned from related  parties                                                                                                                     |   | 0                                     |   | 0 |   |
| Total revenues from operating activities of  continuing operations                                                                                                    |   | 0                                     |   | 0 |   |
| Costs and expenses from operating  activities of continuing operations                                                                                                |   |                                  |   |   |   |
| Cost of equipment product revenues                                                                                                                                    |   | 0                                     |   | 0 |   |
| Cost of service fee revenues                                                                                                                                          |   | 0                                     |   | 0 |   |
| Engineering and development (excluding  depreciation and amortization amounts of $0 and $144 for the three months  ended March 31, 2004 and 2003, respectively). |   | 800                                   |   | 535 |   |
| Sales and marketing (excluding depreciation  and amortization amounts of $0 and $17 for the three months ended  March 31, 2004 and 2003, respectively).          |   | 191                                   |   | 86 |   |
| General and administrative (excluding  depreciation and amortization amounts of $102 and $84 for the three months  ended March 31, 2004 and 2003, respectively). |   | 1,674                                 |   | 192 |   |
| Depreciation and amortization                                                                                                                                         |   | 102                                   |   | 0 |   |
| Total costs and expenses from operating  activities from continuing operations                                                                                        |   | 2,767                                 |   | 813 |   |
| Loss from operating activities of  continuing operations                                                                                                              |   | (2,767                                | )      | (813 | ) |
| Interest and other income                                                                                                                                             |   | 7                                     |   | 0 |   |
| Interest and other expense                                                                                                                                            |   | (1                                    | )      | 0 |   |
| Loss from continuing operations                                                                                                                                       |   | (2,761                                | )      | (813 | ) |
| Income (loss) from discontinued operations                                                                                                                            |   | 23                                    |   | (1,072 | ) |
|                                                                                                                                                                  |   |                                  |   |   |   |
| Net loss                                                                                                                                                              |   | $                                     | (2,738 | ) | $ | (1,885 | ) |
|                                                                                                                                                                  |   |                                  |   |   |   |
| Net loss per common share (basic and  diluted)                                                                                                                        |   | $                                     | (0.10  | ) | $ | (0.08 | ) |
| Weighted average common shares outstanding  - basic and diluted                                                                                                       |   | 27,236,662                            |   | 23,578,645 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

4

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**WORLDGATECOMMUNICATIONS, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(Dollarsin Thousands)**

 
|                                                                                             |   | **Three  months ended  March 31,** |   |
|--------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                             |   | **2004**                                |   | **2003** |   |
| **Cash flows from  operating activities of continuing operations:**                              |   |                                    |   |   |   |
| Net loss                                                                                         |   | $                                       | (2,761 | ) | $ | (813 | ) |
| Adjustments to reconcile net loss to cash  used in operating activities of continuing operations |   |                                    |   |   |   |
| Depreciation and amortization                                                                    |   | 102                                     |   | 0 |   |
| Non-cash stock based compensation                                                                |   | 631                                     |   | 0 |   |
| Changes in operating assets and liabilities  from continuing operations:                         |   |                                    |   |   |   |
| Accounts receivable                                                                              |   | 18                                      |   | 0 |   |
| Prepaid and other assets                                                                         |   | 261                                     |   | 0 |   |
| Accounts payable                                                                                 |   | (95                                     | )      | 0 |   |
| Accrued expenses                                                                                 |   | 111                                     |   | 0 |   |
| Accrued compensation and benefits                                                                |   | (39                                     | )      | 0 |   |
| Other                                                                                            |   | (7                                      | )      | 0 |   |
| Net cash used in operating activities of  continuing operations                                  |   | (1,779                                  | )      | (813 | ) |
| **Cash flows from  investing activities of continuing operations:**                              |   |                                    |   |   |   |
| Capital expenditures                                                                             |   | (8                                      | )      | 0 |   |
| Net cash provided by investing activities  of continuing operations                              |   | (8                                      | )      | 0 |   |
| **Cash flows from  financing activities of continuing operations:**                              |   |                                    |   |   |   |
| Proceeds from the issuance of common stock                                                       |   | 1,406                                   |   | 0 |   |
| Proceeds from the exercise of stock options                                                      |   | 105                                     |   | 0 |   |
| Proceeds from the exercise of stock rights  and warrants                                         |   | 320                                     |   | 0 |   |
| Net cash provided by (used in) financing  activities of continuing operations                    |   | 1,831                                   |   | 0 |   |
| **Net cash  contributed to continuing operations from discontinued operations**                  |   | 39                                      |   | 345 |   |
| **Net increase  (decrease) in cash**                                                             |   | 83                                      |   | (468 | ) |
| **Cash and cash  equivalents, beginning of period**                                              |   | 3,365                                   |   | 589 |   |
| **Cash and cash  equivalents, end of period**                                                    |   | $                                       | 3,448  |   | $ | 121 |   |
|                                                                                             |   |                                    |   |   |   |
| **Cash paid for  interest**                                                                      |   | $                                       | 0      |   | $ | 3 |   |
| **Non-cash financing  activity:**                                                                |   |                                    |   |   |   |
| Issuance  of note payable to finance D&O insurance                                           |   | 0                                       |   | 560 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

5

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WORLDGATE COMMUNICATIONS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

(Dollar Amounts are in Thousands, Except forShares and per Share Amounts)

(Unaudited)

 

1.                                       Basisof Presentation.

 

The unaudited financial statements of WorldGate Communications, Inc.(“WorldGate” or the “Company”) for the three months ended March 31, 2004and March 31, 2003 presented herein have been prepared by the Companypursuant to the rules and regulations of the Securities and Exchange Commissionfor quarterly reports on Form 10-Q. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted pursuant to such rules andregulations.  These financial statementsshould be read in conjunction with the financial statements for the year endedDecember 31, 2003 and the notes thereto included in the Company’s AnnualReport on Form 10-K.

 

The financial information in this Report reflects, in the opinion ofmanagement, all adjustments of a normal recurring nature necessary to presentfairly the results for the interim period. Quarterly operating results are notnecessarily indicative of the results that may be expected for the year endingDecember 31, 2004.

 

2.                                       Liquidityand Going Concern Considerations.

 

As of March 31, 2004 the Company had cash and cash equivalents of$3,448.  The operating cash usage fromcontinuing operations for the three months ended March 31, 2004 was$1,779.  During the third quarter of2003, we completed a sale of certain assets, including our ITV intellectualproperty rights and our membership interest in TVGateway, LLC, for $3,000 incash to TVGateway, LLC, a company we were instrumental in forming. Ourtransaction with TVGateway, LLC, marked a shift in our business away from theITV business and toward a new video phone product and associated business.  The funds we received from the sale ofassets to TVGateway, LLC, as well as the funds we received as a result ofprivate placements of our securities on December 1, 2003, December 4,2003, January 21, 2004, and April 22, 2004, have permitted us to fundthe development of our new business.

 

In December 2003, and January 2004, WorldGate announcedinvestments aggregating to a total of $3,100 by certain institutionalinvestors.  These investors purchased anaggregate of 3,000,000 shares of newly issued common stock. The investors alsoreceived a right, for a limited period of time, to purchase additional sharesof up to 20% of the common stock purchased by the investors in theirinvestment, at the same price as their investment, and five-year warrants topurchase up to 30% of the common stock purchased by the investors in theirinvestment, at an exercise price equal to a twenty-five percent premium totheir purchase price for the investment. The purchase price for the 2 million shares purchased inDecember 2003 transactions was $0.80 per share, with the warrants having a$1.00 per share exercise price.  Thepurchase price for the 1 million shares purchased in the January 2004transaction was $1.50 per share, with the warrants having a $1.875 per shareexercise price.  All additional investedrights associated with the December 2003 transaction were exercised duringJanuary and February of 2004, resulting in an incremental investmentof $320,000.

 

In December 2003, WorldGate announced that it reached agreementwith Mototech, Inc. for the purchase of 625,000 shares of newly issued commonstock at $0.80 per share, in return for future design and engineering servicesby Mototech.  WorldGate previously announcedin November 2003, that it had contracted with Mototech to assist theCompany with the design and volume manufacture of WorldGate’s Ojo personalvideo phone. The purchase price for these shares will be paid by an equivalentreduction in the development and initial procurement payments that wouldotherwise be due to Mototech.  Mototechis an affiliate of Accton Technology Group. They currently manufacture and distribute a full range of highperformance high speed data and computer networking products, including cableset top boxes, home gateways, wireless LANs, hubs, switches, routers, and otherrelated products.  In addition, inApril 2004, Mototech invested $1 million to purchase 666,666 shares ofnewly issued common stock at $1.50 per share.

 

The Company has no outstanding debt and its assets are not pledged ascollateral. The Company continues to evaluate possibilities to obtainadditional financing through public or private equity or debt offerings, bankdebt financing, asset securitizations, or from other sources.  Such additional financing would be subjectto

 

6

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the risk of availability, may be dilutive to our shareholders, or couldimpose restrictions on operating activities. There can be no assurance thatthis additional financing will be available on terms acceptable to the Company,if at all. The Company has limited capacity to further reduce its workforce andscale back on capital and operational expenditures to decrease its cash usagegiven the measures it has already taken to reduce staff and expenses.

 

The consolidated financial statements have been prepared on a goingconcern basis, which contemplates the realization of assets and thesatisfaction of liabilities and commitments in the normal course ofbusiness.  Therefore, the financialstatements do not include any adjustments relating to the Company’s ability tooperate as a going concern.  Theappropriateness of using the going concern basis in the future, however, willbe dependent upon the Company’s ability to address its liquidity needs asdescribed above.  There is no assurancethat the Company will be able to address its liquidity needs through themeasures described above on acceptable terms and conditions, or at all, andaccordingly, there is substantial doubt about the Company’s ability to continueas a going concern.  The independentauditors’ report for the year ended December 31, 2003 includes anexplanatory paragraph stating that because the Company has suffered recurringlosses from operations and has a net accumulated deficiency of $198 million,those issues raise substantial doubt about the Company’s ability to continue asa going concern.

 

3.                                       RecentAccounting Pronouncement.

 

On January 1, 2003. WorldGate adopted SFAS No. 143, *Accounting for Asset Retirement Obligations*,which addresses financial accounting and reporting for obligations associatedwith the retirement of tangible long-lived assets and the associated assetretirement costs. The adoption of SFAS No. 143 did not have any impact onWorldGate’s financial position or results of operations.

 

On January 1, 2003, WorldGate adopted Financial AccountingStandards Board (FASB) Interpretation No. 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantors, Including IndirectGuarantees of Indebtedness of Others*, which requires that uponissuance of a guarantee, the guarantor must recognize a liability for the fairvalue of the obligation that it assumes under the guarantee. Guarantors arealso required to meet expanded disclosure obligations. The adoption ofInterpretation No. 45 did not have a material impact on WorldGate’s financialposition or results of operations.

 

In January 2003, the FASB issued Interpretation No. 46, *Consolidation of Variable Interest Entities*.Interpretation No. 46 addresses consolidation by business enterprises ofvariable interest entities, which are entities that either (a) do not haveequity investors with vesting rights or (b) have equity investors that do notprovide sufficient financial resources for the entity to support itsactivities. The interpretation is effective immediately for variable interestentities created after February 1, 2003. In December 2003, the FASBpublished FASB Interpretation No. 46 (revised December 2003), *Consolidation of Variable Interest Entities*(FIN 46(R)). FIN 46(R), among other things, defers the effective date ofimplementation for certain entities. The revised interpretation is effectivefor the first interim or annual reporting period ending after March 15,2004, with the exception of structures that are commonly referred to asspecial-purpose entities, for which the statement is effective for periodsending after December 15, 2003. The adoption of Interpretation No. 46 isnot expected to have a material impact on WorldGate’s results of operations orfinancial position.

 

In April 2003, the FASB issued SFAS No. 149, *Amendment of Statement No. 133 on DerivativeInstruments and Hedging Activities*. This statement amends andclarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts and forhedging activities under SFAS No. 133. SFAS No. 149 requires that contractswith comparable characteristics be accounted for similarly. The statement iseffective for contracts entered into or modified after June 30, 2003 andfor hedging relationships designated after June 30, 2003. The provisionsof SFAS No. 149 generally are to be applied prospectively only. The adoption ofSFAS No. 149 did not have a material impact on WorldGate’s results ofoperations or financial position.

 

In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity*. SFAS No. 150 establishes standards forclassification and measurement by an issuer of certain financial instrumentswith characteristics of both liabilities and equity. The statement requiresthat an issuer classify a financial instrument that is within the scope as aliability (or asset in some circumstances). This statement is effective forfinancial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of the first interim period beginningafter June 15, 2003, except as it relates to consolidated limited-lifesubsidiaries. The FASB indefinitely deferred the effective date of this

 

7

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statement as it relates to certain mandatorily redeemablenon-controlling interests in consolidated limited-life subsidiaries. WorldGatedoes not have any interest in limited-life entities as of December 31,2003. The adoption of the effective provisions of SFAS No. 150 did not have animpact on WorldGate’s results of operations or financial position.

 

In December 2003, the FASB issued SFAS No. 132 (revised 2003), *Employer’s Disclosures about Pensions and OtherPostretirement Benefits*. This statement revises employers’disclosures about pension plans and other postretirement benefit plans; howeverit does not change the measurement or recognition of those plans required bySFAS No. 87, *Employers’ Accounting forPensions*, SFAS No. 88, *Employers’Accounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefits*, and SFAS No. 106, *Employers’ Accounting for Postretirement BenefitsOther Than Pensions*. The revised statement retains the disclosurerequirements contained in the original SFAS No. 132 and requires additionaldisclosures to those in the original statement about the assets, obligations,cash flows, and net periodic benefit cost of defined benefit pension plans andother defined benefit postretirement plans. The revised statement is effectivefor fiscal years ending after December 15, 2003.

 

4.                                       Inventories.

 

Inventories are summarized as follows:

 
|                                    |   | **March 31,  2004** |   | **December 31,  2003** |   |
|-----------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                                    |   |                     |   |                        |   |
| Raw material                            |   | $                        | 1,622  |                        | $      | 1,622 |   |
| Work in progress                        |   | —                   |   | —                      |   |
| Finished goods                          |   | —                   |   | —                      |   |
| Inventory held by customers and vendors |   | —                   |   | —                      |   |
| Total inventory                         |   | 1,622                    |   | 1,622                       |   |
| Inventory reserve                       |   | (1,622                   | )      | (1,622                      | )      |
| Net inventory                           |   | $                        | — |                        | $      | — |   |

 

5.                                       Stock-BasedCompensation.

 

The Company accounts for stock-based compensation in accordance withAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” as amended by SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure”.

 

The Company applies Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” and relatedinterpretations in accounting for its plans, and accordingly, no compensationcost has been recognized for the Company’s fixed stock based compensation.  Had compensation cost been determinedconsistent with SFAS No. 123, as amended by SFAS No. 148, the Company’s netloss would have been increased to the following pro forma amounts:

 
|                                                                                                                                 |   | **For the  Three Month Period  Ended March 31,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|--------|
|                                                                                                                                 |   | **2004**                                              |   | **2003** |   |
|                                                                                                                                 |   |                                                  |   |   |   |
| Net loss:                                                                                                                            |   |                                                  |   |   |   |
| As reported                                                                                                                          |   | $                                                     | (2,738 | ) | $ | (1,885 | ) |
| Add:  Stock-based compensation expense included in reported net loss, net of  related tax effects of $0                              |   | 0                                                     |   | 40 |   |
| Deduct: Total stock-based employee expense  determined under the fair value based method for all awards, net of related  tax effects |   | (2,249                                                | )      | (1,420 | ) |
| Pro forma net loss                                                                                                                   |   | (4,987                                                | )      | (3,265 | ) |
| Net Loss  per share:                                                                                                                 |   |                                                  |   |   |   |
| Basic and  diluted – as reported                                                                                                |   | (0.10                                                 | )      | (0.08 | ) |
| Basic and  diluted - pro forma                                                                                                       |   | (0.18                                                 | )      | (0.14 | ) |
|                                                                                                                                      |        |                                                       |        |  |  |  |  |

 

8

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Such pro forma disclosures may not berepresentative of future compensation expense because options vest over severalyears and additional grants are made each year.

 

6.               Related Party Transactions.

 

In 1997, the Company entered into agreements with certain cableoperators who are investors.  Revenuesrecognized from such investors were approximately $0 and $57, for the threemonths ended March 31, 2004 and March 31, 2003, respectively.Accounts receivable from such investors amounted to approximately $0 atMarch 31, 2004 and $2 at December 31, 2003.

 

The Company has agreements with some investors for the investors toprovide engineering and development support. As a result of those agreements,the Company has expensed approximately $0 and $391, respectively, for the threemonths ended March 31, 2004 and March 31, 2003, respectively.Accounts payable to these stockholders amounted to $316 and $170 atMarch 31, 2004 and December 31, 2003, respectively. Some of thesestockholders were suppliers of technology and components for the Company’sdiscontinued ITV products and services. These agreements provided for licensingof technology, as well as contracted services, including hardware and softwaredevelopment, product testing and certification, and the creation anddevelopment of tools and systems to facilitate the Company’s engineeringefforts. These agreements did not provide for ongoing royalties, purchaseprovisions, or for any requirement to provide additional funding to theCompany.

 

In 1998 the Company entered into a leasing arrangement for a buildingwith an entity formed by non-employee investors. Included in deposits and otherassets at March 31, 2004 and 2003 is $0 and $750, respectively, related tothis lease. The Company has not paid its rent on its current facility since May2003. As a result, its landlord, 3190 T General, Inc. in September 2003,filed an action in the Court of Common Pleas, Bucks County Pennsylvania toperfect its interest to take possession of the Company’s facility at any time,and to establish damages for past rent and expenses. Although a judgment hasbeen granted allowing the Company’s landlord to regain possession of thefacility, the Company remains in the facility and is in the process ofnegotiating a settlement of it lease obligation with the landlord in an effortto reduce the Company’s outstanding liability and secure the continued right tooccupy the facility with a reduced ongoing lease obligation, although there canbe no assurance that a settlement can be obtained. In lieu of monthly rentpayments of $104 (offset by monthly sublease payments by TVGateway of $19during the period February 1, 2003 through January 31, 2004), theCompany’s landlord has drawn down from its security deposit to satisfy theunpaid rent of $911 as of March 31, 2004. As of March 31, 2004, theamount of the deposit remaining after deduction for the unpaid rent is $0.  The Company has continued to accrue the fullrent expense through March 31, 2004.

 

7.               TVGateway Joint Venture and relatedCable Operator Agreements.

 

On July 24, 2000, the Company formed aseparate joint venture, TVGateway, LLC, with four cable operators.  As part of this venture WorldGate enteredinto a management agreement with TVGateway to provide engineering, operationsand administrative support services. In addition to providing for the terms andconditions under which such services were to be provided, the managementagreement provided for WorldGate and TVGateway to cooperate to transition toTVGateway some or all of the support services being provided by WorldGateand/or the employees providing these services. In addition, this provisionrequired WorldGate to remain available to provide support services untilJuly 24, 2005. During 2002 WorldGate and TVGateway agreed to commence thetransition of services pursuant to this provision. In addition, the partiesagreed that the management agreement would be of no further force and effectwith respect to the services that are transferred as of the date of completionof the specific transfers. The companies completed this transition in the firstquarter 2003, and accordingly, WorldGate has now been relieved of any continuingobligation to provide such transitioned services.  Further, WorldGate will no longer receive future revenues fromthe management agreement with TVGateway.

 

Revenues for such services, which areincluded in service fee revenue, totaled $0, and $732, respectively for thethree months ended March 31, 2004 and 2003. In addition, product sales toTVGateway totaled $0 and $1,079 for the three months ended March 31, 2004and 2003. Accounts Receivable from TVGateway amounted to

 

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$0 at March 31, 2004 and $0 atDecember 31, 2003. WorldGate was accounting for its 18% investment in theTVGateway joint venture, which was previously reduced to a carrying value of $0due to prior losses, under the equity method.

 

On September 30, 2003 the Companyannounced that it had sold to TVGateway, LLC certain ITV intellectual propertyrights and certain software and equipment related to the ITV business, whichTVGateway was currently using, for $2,400. In addition, on August 7, 2003, WorldGate and TVGateway enteredinto a redemption agreement pursuant to which TVGateway redeemed WorldGate’sequity interest in TVGateway for $600 thousand in cash.  The purchase price for these assets in theaggregate was $3,000 and was used by the Company to fund continuing operations,as well as to develop and distribute its new Ojo video telephony product. Aspart of this transaction WorldGate retained a royalty-free license to certainof the transferred intellectual property rights and software. At this time theCompany does not plan to continue to support this interactive television (ITV)business.

 

In connection with the Asset PurchaseAgreement we entered into with TVGateway for the sale of certain ITV Businessassets, we have an obligation to indemnify TVGateway for any losses frombreaches of our representations or warranties in the Asset Purchase Agreementthat occur within twelve months after the closing date of the TVGatewaytransaction or within the applicable statute of limitations period for claimsrelating to our ownership of our assets, payment of our taxes, and ourcompliance with applicable laws, if longer. Our indemnification obligations arelimited by an overall cap of $500 on the amount of the indemnification.Although we know of no breaches of our representations or warranties, thepayment of any such indemnification obligations would adversely impact our cashresources and our ability to pursue our video phone business.

 

8.               Net Loss per Share.

 

Basic and diluted net loss per common share is computed by dividing thenet loss available to common stockholders for the period by the weightedaverage number of shares of common stock outstanding during the period.  The calculation of diluted net loss percommon share excludes potential common shares if the effect isantidilutive.  Potential common sharescomprise shares of common stock issuable upon the exercise of stock options andwarrants.  The number of potentialcommon shares which would have been assumed to be converted in the periodsended March 31, 2004 and 2003 and have a dilutive effect if the Companyhad income from continuing operations, or if the options’ exercise price wasless than the average market price of the common shares, is 8,065,111 and6,500,833, respectively.

 

# ITEM 2.                             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

#  

(Dollar Amounts are in Thousands, Except perShare Amounts)

 

FORWARD-LOOKING AND CAUTIONARY STATEMENTS.

 

We may from time to time make written or oral forward-lookingstatements, including those contained in the following Management’s Discussionand Analysis of Financial Condition and Results of Operations. The words“estimate,” “project,” “believe,” “intend,” “expect,” and similar expressionsare intended to identify forward-looking statements, although not allforward-looking statements contain these identifying words. In order to takeadvantage of the “safe harbor” provisions of the Private Securities LitigationReform Act of 1995, we are hereby identifying certain important factors, whichcould cause our actual results, performance or achievement to differ materiallyfrom those that may be contained in or implied by any forward-looking statementmade by or on behalf of WorldGate.  Thefactors, individually or in the aggregate, that could cause suchforward-looking statements not to be realized include, without limitation, thefollowing: (1) difficulty or inability to raise additional financing on termsacceptable to us, (2) difficulty in developing and implementing marketing andbusiness plans, (3) continued losses, (4) industry competition factors andother uncertainty that a market for our products will develop, (5) challengesassociated with broadband operators (including, uncertainty that they willoffer our products, inability to predict the manner in which they will marketand price our products and existence of potential conflicts of interests andcontractual limitations impeding their ability to offer our products), (6)departure of one or more key persons,  (7) delisting of our Common Stock from the NASDAQ Small CapMarket, (8) changes in regulatory requirements, and (9) other risks identifiedin our filings with the Securities and Exchange Commission.  We caution you that the

 

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foregoing list of important factors is not intended to be, and is not,exhaustive.  We do not undertake toupdate any forward-looking statement that may be made from time to time by oron behalf of WorldGate.

 

Results of Operations:

 

Critical Accounting Policies and Estimates.

 

The consolidated financial statements are prepared in conformity withaccounting principles generally accepted in the United States.  The preparation of these financialstatements required management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

The significant accounting policies of the Company are described in thenotes to the consolidated financial statements included in the annual report onForm 10-K.  Judgments and estimates ofuncertainties are required in applying the Company’s accounting policies inmany areas.  Following are some of theareas requiring significant judgments and estimates:  revenue recognition, accounts receivable, inventories, and cashflow and valuation assumptions in performing asset impairment tests oflong-lived assets.

 

Discontinued Operations

 

During the first quarter of 2004 the Company transitioned from thebusiness of developing and selling interactive television, or ITV, technology,products and services for use in conjunction with cable TV broadband networks(the “ITV business”) to the development of our video phone products as ourprimary business focus. During the three months ended March 31, 2004 theCompany had revenues from discontinued operations of $82, compared to revenuesof $2,165 for the three months ended March 31, 2003.  This reduction of $2, 083 reflects servicerevenues of $0 and $978 for the three months ended March 31, 2004 and2003, respectively, and equipment revenues of $82 and $1,187 for the threemonths ended March 31, 2004 and 2003, respectively. Concurrently,operating expenses, consisting of Research and Development, Marketing andGeneral and Administration costs were also reduced as a result of thetransition from the ITV business.  Theseexpenses were $16 for the three months ended March 31, 2004, compared to$2,619 for the three months ended March 31, 2003.

 

The information in our quarter to quarter comparisons below representsonly our results from continuing operations.

 

Three Months Ended March 31, 2004 and March 31, 2003

 

Revenues.

 

Revenues.  There were norevenues from continuing operations during the three months endedMarch 31, 2004 and March 31, 2003. Expectation is that revenues fromvideo phones will not be realized until, at the earliest, the third quarter of2004.

 

Costs and Expenses.

 

Cost of Revenues.  There were nocosts of revenues from continuing operations during the three months endedMarch 31, 2004 and March 31, 2003. Expectation is that costs ofrevenues from video phones will not be incurred until, at the earliest, thethird quarter of 2004.

 

Engineering and Development. Engineering and development expenses primarily consist of compensation,and the cost of design, programming, testing, documentation and support of the Company’svideo phone product.  Engineering anddevelopment costs were $800 for the three months ended March 31, 2004,compared with $535 for the three months ended March 31, 2003.  This increase of $264, or 49%, reflects theCompany’s increased concentration of its engineering staff, and related costs,for the further and continuing development of its video phone product.

 

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Sales and Marketing.  Sales andmarketing expenses consist primarily of compensation, attendance at conferencesand trade shows, travel costs, promotions and other marketing programs relatedto the introduction of the Company’s video phone product.  Sales and marketing costs were $191 for thethree months ended March 31, 2004, compared with $86 for the three monthsended March 31, 2003.  Thisincrease of $105, or 122%, reflects the increased effort of staff, and relatedmarketing and promotional expenditures, for the Company’s video phone product.

 

General and Administrative. General and administrative expenses consist primarily of expendituresfor administration, office and facility operations, finance and generalmanagement activities, including legal, accounting and professional fees.  General and administrative expenses were$1,674 for the three months ended March 31, 2004, compared with $192 forthe three months ended March 31, 2003. This increase of $1,482, or 772%, is primarily attributable to theCompany’s transition of nearly all, or 99%, of its administrative managementcompensation, facility, legal, finance and professional consulting fees towardthe further development of the video phone business, and a onetime non cashcharge of $631 reflecting a Black Scholes estimate of the value of the warrantsissued as part of the private placement of the Company’s stock to certaininstitutional investors in January 2004. For the three months ended March 31, 2003, video phone relatedcosts were 20% of total General and Administrative expenses of $962.

 

Interest and Other Income and Interest Expense.  Interest and other income and interestexpense consist of interest earned on cash and cash equivalents, and interestexpense on short-term debt.  Interestand other income decreased from $27 for the three months ended March 31,2003 to $7 for the three months ended March 31, 2004, primarily due todeclining interest rates.  During thethree months ended March 31, 2003, the Company earned interest on averagecash balances of approximately $3,712 and incurred interest expense related toits insurance financing.  In comparison,during the three months ended March 31, 2004 the Company earned intereston average cash balances of approximately $3,878 and incurred interest expenserelated to its insurance financing.

 

IncomeTaxes.  The Company has incurred netoperating losses since inception and accordingly had no income taxes and hasnot recorded any income tax benefit for those losses.

 

Liquidity and Capital Resources.

 

As of March 31, 2004, our primary source of liquidity consisted ofcash and cash equivalents that are highly liquid, are of high qualityinvestment grade and have maturities of less than one year.

 

At March 31, 2004, we had cash and cash equivalents of $3,448 (andno short-term investments) as compared to cash and equivalents of $3,365 (andno short-term investments) at December 31, 2003.  Net cash used in continuing operations was $1,779 for the threemonths ended March 31, 2004, as compared to $813 used for the same periodin 2003.  This increase in net cash usedfor continuing operations was primarily attributable to the Company’s increasein expenditures related to the video phone business.  The Company recorded bad debt expense in the amount of $16 fromdiscontinued operations during the three months ended March 31, 2004 toreflect its current assessment of the collectability of certain receivables.

 

Cash provided by investing activities from continuing operations duringthe three months ended March 31, 2004, totaled $1,831 compared to $0provided during the same period in 2003. During the three months ended March 31, 2004 net proceeds from ourmaturing short-term investments were $0 compared to $746 for the three monthsended March 31, 2003.  Capitalexpenditures were $6 and $0 for the three months ended March 31, 2004 and2003, respectively.

 

Operations and Liquidity.

 

To date, the Company has funded operations primarilythrough private sales of equity securities and through an initial publicoffering of common stock in April 1999. As of March 31, 2004 the Company had cash, and cash equivalents of$3,448.  The operating cash usage fromcontinuing operations for the three months ended March 31, 2004 was$1,779.  As of March 31, 2004 wehave no outstanding debt and our assets are not pledged as collateral.  However, we have not paid our monthly rentof $104 (offset by monthly sublease payments by TVGateway of $19 during theperiod February 1, 2003 through January 31, 2004) on our currentfacility since May 2003.  As a result,our landlord, a non-employee investor, has perfected its interest to takepossession of our facility at any time and has drawn down from our rent depositto satisfy the unpaid rent of $911 as of March 31, 2004.  As of March 31,

 

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2004 the amount of the deposit remaining is $0 after deduction for theunpaid rent.  The Company has continuedto accrue the full rent expense through March 31, 2004.  We continue to negotiate with our landlordto resolve this matter.  We alsocontinue to evaluate possibilities to obtain additional financing throughpublic or private equity or debt offerings, bank debt financing, assetsecuritizations, or from other sources. Such additional financing would be subject to the risk of availability,may be dilutive to our shareholders, or could impose restrictions on operatingactivities.  There can be no assurancethat this additional financing will be available on terms acceptable to us, ifat all.  The Company has limitedcapacity to further reduce its workforce and scale back on capital andoperational expenditures to decrease cash burn given the measures it hasalready taken to reduce staff and expenses.

 

With the private placement of the Company’s commonstock, together with additional rights and warrants, resulting in the aggregategross proceeds received of $1.5 million in January 2004, and the privateplacement of the Company’s common stock in April 2004 providing proceedsof $1,000, the Company projects it will have sufficient funding to continueoperations into the fourth quarter of 2004, assuming no additional funding isreceived.  To this end, we have beendiscussing, and continue to discuss, possible financing transactions withseveral parties.  No assurances can begiven that a transaction can be consummated prior to the depletion of ouravailable cash.  We however remainhopeful that sufficient funding can be obtained to continue the Company’soperations.  The independent auditors’report for the year ended December 31, 2003 included an explanatoryparagraph stating that because the Company has suffered recurring losses fromoperations and has a net accumulated deficiency of $199 million, those issuesraise substantial doubt about the Company’s ability to continue as a goingconcern.

 

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# ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK.

 

Interest Rate Risk.  Ourexposure to market risk related to changes in interest rates relates primarilyto our investment portfolio.  We investin instruments that meet high credit quality standards, and we limit the amountof credit exposure with respect to any one issue, issuer and type ofinvestment.

 

As of March 31, 2004, the Company’s cash and cash equivalents were$3,448, most of which were securities having a maturity of less than one year,and it had no short-term investments. Due to the average maturity and conservative nature of our investmentportfolio, management believes a sudden change in interest rates would not havea material effect on the value of the portfolio. Management estimates that hadthe average yield of our investments decreased by 100 basis points, ourinterest income for the three months ended March 31, 2004 would havedecreased by approximately $18. This estimate assumes that the decreaseoccurred on the first day of 2004 and reduced the yield of each investmentinstrument by 100 basis points.  Theimpact on our future interest income of future changes in investment yieldswill depend largely on our total investments.

 

Foreign Currency Exchange Risk. Although we transact business in various foreign countries, theprincipal portion of our business is in the United States and substantially allof our revenues and costs to date have been denominated in U.S. dollars.  As a result, adverse movements in foreign currencyexchange rates would not have a material adverse effect on us.

 

# ITEM 4.  CONTROLS AND PROCEDURES.

 

As of the end of the period covered by this Form 10-Q, the Company’sprincipal executive and principal financial officers, including its chief executiveofficer and chief financial officer, conducted an evaluation of theeffectiveness of the Company’s disclosure controls and procedures. Based onthat evaluation, the chief executive officer and chief financial officerconcluded that the Company’s disclosure controls and procedures were effective.There have been no changes in the Company’s internal control over financialreporting that occurred during the period ended March 31, 2004, that havematerially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

(Dollar Amounts are in Thousands, Except perShare Amounts)

 

# ITEM 1.  LEGAL PROCEEDINGS.

#  

We have not paid our rent on our current facility since May 2003.  As a result, our landlord, 3190 T General,Inc. has filed an action in the Court of Common Pleas, Bucks CountyPennsylvania to perfect its interest to take possession of our facility at anytime, and to establish damages for past rent and expenses.  Although a judgment has been grantedallowing our landlord to regain possession of the facility, we remain in thefacility and in the process of negotiating a settlement of our lease obligationwith the landlord in an effort to reduce our outstanding liability and securethe continued right to occupy the facility with a reduced ongoing leaseobligation, although there can be no assurance that a settlement can beobtained.  In lieu of rent payments ourlandlord has been drawing down from our security deposit to satisfy the unpaidrent.  As of February 2004, thesecurity deposit has been fully utilized.

 

# ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

 

On January 21,2004, we completed a private placement to certain institutional investors of1,000,000 shares of our common stock at a sale price of $1.50 per share,five-year warrants to purchase up to 300,000 shares of our common stock at anexercise price of $1.875 per share, and additional investment rights to purchase,for a limited period of time, up to 200,000 shares of our common stock at anexercise price of $1.50 per share. In addition, we agreed to issue warrants topurchase up to an additional 10,000 shares of our common stock at an exerciseprice of $1.875 per share upon the exercise of the additional investmentrights.

 

The private placement resulted in grossproceeds to the Company of approximately $1,500,000. Ashenden Finance acted asthe Company’s placement agent with respect to the Private Placement andreceived a fee equal to 3% ofthe gross proceeds. In addition, Janney Montgomery Scott LLC received a feeequal to 1% of the gross proceeds from the Private Placement in connection withits engagement by the Company.

 

The common shares, warrants, and additionalinvestment rights were issued in reliance upon the exemption from theregistration requirements of the Securities Act afforded to transactions notinvolving a public offering by Section 4(2) of that Act and Rule 506thereunder.

 

The resale of the securities issued in the private placement wasregistered on Form SB-2 (Registration No. 333-114143). This registrationstatement covers the re-sale of the common stock issued in connection with theJanuary private placement, as well as the re-sale of any remainingsecurities issued in connection with our December 2004 private placements,and the common stock issuable upon exercise of the warrants, additionalinvestment rights, and additional investment right warrants.

 

# ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

#  

None.

 

# ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.

#  

None.

 

# ITEM 5.  OTHER INFORMATION.

*Relationship with Motorola, Inc.*

 

On April 28, 2004, we entered into a Development and DistributionAgreement with General Instrument Corporation d/b/a the Broadband CommunicationSector of Motorola, Inc., or Motorola, pursuant to which Motorola hasagreed to distribute our Ojo video phone on a worldwide basis. The agreementprovides for WorldGate to become the exclusive supplier of broadband video phonesto Motorola, and Motorola to become the exclusive supplier of our Ojo videophone products. This mutually exclusive relationship would also be subject tocertain time restrictions, and could be extended or terminated under certaincircumstances specified in the

 

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agreement. Pursuant to the Development and Distribution Agreement,Motorola will advance $1,000,000 to us as a credit against product purchases invarious installments based upon the achievement of certain milestones relatingto the product.

 

As part of the Development and Distribution Agreement with Motorola, weissued a warrant to Motorola to purchase 300,000 shares of our common stock atan exercise price of $1.4375 per share, and we agreed to issue additionalwarrants to purchase up to an additional 1,950,000 shares of our common stock,upon the achievement of certain product and sales milestones, at an exerciseprice based upon the average closing sales price of our common stock during the20 day period preceding the issuance of each warrant. We also grantedMotorola a license to use our intellectual property rights relating to the Ojovideo phone solely in connection with their distribution of the Ojo video phoneunder the Agreement.

 

*Private Placement to Mototech, inc.*

 

On April 23, 2004, we announced that we had completed a privateplacement of 666,666 shares of our common stock to Mototech, Inc., at a saleprice of $1.50 per share, resulting in proceeds to the Company of $1 million.  WorldGate previously announced in November 2003 that it hadcontracted with Mototech Inc. to assist the Company with the design and volumemanufacture of WorldGate’s Ojo personal video phone.

 

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# ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

 

(a) Exhibits.

 

The following is a list of exhibits filed as part of this report onForm 10-Q.  Where so indicated byfootnote, exhibits that were previously filed are incorporated byreference.  For exhibits incorporated byreference, the location of the exhibit in the previous filing is indicatedparenthetically except in those situations where the exhibit number was thesame as set forth below.

 
| **Exhibit** |   | **Description**                                                                                                                                                                                                                                                                                                                                           |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                                                                                                      |
| 2.1         |   | Asset Purchase Agreement dated as of August 6, 2003 between the  Company and TVGateway, LLC (1)                                                                                                                                                                                                                                                      |
| 3.1         |   | Amended and Restated Certificate of Incorporation (2)                                                                                                                                                                                                                                                                                                     |
| 3.2         |   | Amended and Restated Bylaws (2)                                                                                                                                                                                                                                                                                                                           |
| 4.1         |   | Form of Warrant issued by the Company to the Purchasers (as defined  in the Amended and Restated Securities Agreement between the Company and the  Purchasers dated as of December 4, 2003) (3)                                                                                                                                                      |
| 4.2         |   | Form of Additional Investment Right issued by the Company to the  Purchasers (as defined in the Amended and Restated Securities Agreement  between the Company and the Purchasers dated as of December 4, 2003) (3)                                                                                                                                  |
| 4.3         |   | Form of Warrant dated as of January 21, 2004 issued by the  Company to the Purchasers (as defined in the Securities Purchase Agreement  dated as of January 21, 2004) (4) (filed as Exhibit 4.1 to the January 8-K)                                                                                                                        |
| 4.4         |   | Form of Additional Investment Right dated as of January 21, 2004  issued by the Company to the Purchasers (as defined in the Amended and  Restated Securities Agreement dated as of January 21, 2004 between the  Company and the Purchasers) (4) (filed as Exhibit 4.2 to the  January 8-K)                                               |
| 10.1        |   | Lease Agreement dated October 7, 1998 between WorldGate and  Balanced Capital LLC, as amended by First Amendment to Lease Agreement dated  December 7, 1998 between WorldGate and Balanced Capital LLC, as further  amended by Second Amendment to Lease Agreement dated December 17, 1998  between WorldGate and Balanced Capital LLC (5) |
| 10.2        |   | Manufacturing Agreement between WorldGate and Mototech Inc. dated  September 9, 2003 (6)                                                                                                                                                                                                                                                             |
| 10.3        |   | First Amended and Restated Stockholders’ Agreement dated  September 2, 1998 among WorldGate and the stockholders identified  therein (5) (filed as Exhibit 10.16 to the IPO Registration Statement)                                                                                                                                             |
| 10.4        |   | Amendment to First Amended and Restated Stockholders’ Agreement dated  July 21, 2000 among WorldGate and the stockholders identified therein  (7) (filed as Exhibit 10.9 to the 2000 Annual Report)                                                                                                                                             |
| 10.5        |   | Amended and Restated 1996 Stock Option Plan, as amended (7) (filed as  Exhibit 10.10 to the 2000 Annual Report)                                                                                                                                                                                                                                           |
| 10.6        |   | 2001 Employee Stock Purchase Plan (7) (filed as Exhibit 10.11 to the  2000 Annual Report)                                                                                                                                                                                                                                                                 |
| 10.7        |   | Amended and Restated Securities Purchase Agreement dated as of  December 4, 2003 by and between the Company and the Purchasers (as  defined therein) (8) (filed as Exhibit 99.1 to the December 8-K)                                                                                                                                            |
| 10.8        |   | Securities Purchase Agreement dated as of January 21, 2004 by  and between the Company and the Purchasers (as defined therein) (4) (filed as  Exhibit 99.1 to the January 8-K)                                                                                                                                                                  |
| 31.1        |   | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of  2002*                                                                                                                                                                                                                                                                            |
| 31.2        |   | Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002*                                                                                                                                                                                                                                                                            |
| 32.1        |   | Certification pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002*                                                                                                                                                                                                                                                                            |
| 32.2        |   | Certification pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002*                                                                                                                                                                                                                                                                            |

 

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*                                         Filedherewith.

 

(1)                                  Incorporated byreference to the exhibits to Exhibit A to the Company’s Proxy Statement datedAugust 26, 2003.

 

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(2)                                  Incorporated byreference to the exhibits to the Company’s Form 10-Q Report for thequarter ended March 31, 1999.

 

(3)                                  Incorporated byreference to the exhibits to the Company’s Current Report on Form 8-K datedDecember 2, 2003.

 

(4)                                  Incorporated byreference to Exhibit 4.1 to the Company’s Current Report on Form 8-K datedJanuary 21, 2004 (the “January 8-K”).

 

(5)                                  Incorporated byreference to the exhibits to the Company’s Registration Statement onForm S-1 (Registration No. 333-71997) (the “IPO RegistrationStatement”).

 

(6)                                  Incorporated byreference to the exhibits to the Company’s Registration Statement onForm SB-2 (Registration No. 333-111571) (the “SB-2”).

 

(7)                                  Incorporated byreference to the exhibits of the Company’s Annual Report on Form 10-K/Afor the fiscal year ended December 31, 2000, filed August 17, 2001(the “2000 Annual Report”).

 

(8)                                  Incorporated byreference to the exhibits to the Company’s Current Report on Form 8-K datedDecember 4, 2003 (the “December 8-K”).

 

(b)                                 Reports on Form 8-K.

 

During the fiscal quarter ended March 31, 2004, the Company filedthe following Current Reports on Form 8-K:

 

On March 15, 2004, a Current Report on Form 8-K was filed,reporting under items 7 and 12 that the Company announced its earnings for thefiscal year ended December 31, 2003.

 

On January 21, 2004, a Current Report on Form 8-K was filed,reporting under items 5 and 7 that the Company had entered into definitiveagreements with certain institutional investors in connection with a privateplacement of the Company’s common stock raising gross proceeds to the Companyof approximately $1.5 million.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of1934,  the registrant has duly causedthis report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   |         |   | WORLDGATE COMMUNICATIONS, INC.               |
|--------|--------------|--------|----------------------------------------------|
|   |         |   |                                         |
|   |         |   |                                         |
| Date:  | May 14, 2004 |   | /s/ Hal M. Krisbergh                         |   |
|   |         |   | Hal M. Krisbergh                             |
|   |         |   | Chairman and Chief Executive Officer         |
|   |         |   | (Principal Executive Officer)                |
|   |         |   |                                         |
|   |         |   |                                         |
| Date:  | May 14, 2004 |   | /s/ Joel Boyarski                            |   |
|   |         |   | Joel Boyarski                                |
|   |         |   | Vice President and Chief Financial Officer   |
|   |         |   | (Principal Financial and Accounting Officer) |
|        |              |        |                                              |  |  |

 

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